NOVEMBER 2006 CASES PENNSYLVANIA SUPREME COURT FINDS NO INSURANCE COVERAGE FOR NEGLIGENT BREACH OF CONTRACT (Pennsylvania Supreme Court)

In 2003, Pennsylvania’s Superior Court issued two apparently contradictory opinions.  In Freestone v. New England Log Homes, the Superior Court found that the “gist of the action” doctrine mandated that a claim for providing faulty building materials was a breach of contract claim and not a tort claim.  As breaches of contract are not occurrences or accidents under insurance policies, there was no covered claimed.  In seemingly direct contradiction with Freestone and prior Superior Court case law, a three judge panel in Kvaerner Metals v. Commercial Union Insurance Company found that a breach of warranty/contract claim for poor workmanship could be an accident or occurrence.  In essence, this Court, while never addressing the gist of the action doctrine, found that there could be insurance for a negligent breach of contract.  Both cases went up to the Supreme Court.  The Freestone case settled before oral argument, leaving only the Kvaerner case for decision.

On October 25, 2006, in Kvaerner Metals a Division of Kvaerner U.S. v. Commercial Union Insurance Company, the Supreme Court reversed the Superior Court’s Kvaerner decision and found no insurance coverage for the breach of contract and breach of warranty claims; rejecting the idea that a negligent breach of contract is a covered accident.  Claims for poor workmanship were not accidents constituting occurrences under commercial general liability policies.  Kvaerner only involved a claim for damages directly to the product that was purportedly the object of the poor manufacture.  The Court did not expressly address the gist of the action doctrine on whether a claim sounds in contract or tort, and how this would affect insurance coverage under a general liability policy, because the Freestone case — which directly addressed that issue — had settled.   It is certainly clear that a claim based on failure of performance by an insured resulting in damages to the object of that performance is not a covered claim.

Finally, the Supreme Court rejected the idea that the question of a duty to defend or to cover could go outside the four corners of the Complaint.  The Superior Court in Kvaerner had been willing to consider the insured’s expert report that the damage may have occurred from severe winds rather than poor workmanship, as well as some premature grouting work that constituted an occurrence.  The Supreme Court rejected that argument, making clear that it was only the Complaint that could frame the underlying claims and duty to defend and indemnify.

Date of Decision:  October 25, 2006